PEDAGOGICAL UNIVERSITY

Higher School of Accounting and Management - ESCOG

Chair: Monetary Economics, 4th year - Business Management.

Elements of Group 3: Sania Abudala Mepula;

Sérgio Alfredo Macore.

RESOLUTION OF THE PRACTICAL CLASS

Part One: True (T) and False (F) Statements.

Truth (T).

2. False (F). Barter is the name given in the economy that practices the exchange of goods for
work.

3. False (F). In fact, to prevent counterfeiting, coins were minted by the state.

4. False (F). Because scriptural or bank currency is different from fiduciary currency.

5. False (F). Because, even if the central bank buys dollars from an exporter, in fact
there will be no creation of any currency.

6. False (F). Because portability means it is very easy to handle and even
The fact that a person has a lot of money in their pocket won't be noticed, because money doesn't weigh anything.

7. False (F). Because the monetary base is given by MO and not M1.

8. False (F). Because (B) is monetary base and not means of payment.

9. False (F). Because even if foreign direct investment increases, the money supply will not rise.

10. False (F). Because even with the increase in the deposit rate, the multiplier effect remained.
be constant.

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Part II: Development Issues

1. The currency has three functions that distinguish it from other assets in the economy:

. Medium of exchange: a medium of exchange is something that buyers give to sellers when
they purchase goods and services, allowing the transaction to occur without the need for
double coincidence of wants, as occurs in the case of barter economy;
. Unit of account: a unit of account is a standard of measurement that people use.
to measure and record economic values, such as prices, debts, income, etc.
. Store of value: a store of value is something that can be used to transfer power of
purchase of the gift for the future.

2. The characteristics of the currency are:

. Indestructibility
. Unalterability;
. Homogeneity;
. Divisibility;
. Transmissibility;
. Ease of handling and transportation.

3. The factors that determine the variations of monetary stocks within the economic system
are:

. Endogeneity of the money supply

. Transmission mechanisms of monetary effects.

4. Examining the role of money in the economy in relation to macroeconomic variables

series:

. The interest rate is the compensation that the borrower of a loan must pay to
owner of the borrowed capital.
. Inflation is defined as the percentage change in the price level. Therefore,
we need to properly identify the price level. In the model we developed
So far, the price level P is used in the sole product of the economy. In practice, the
inflation is normally measured by the variation of the consumer price index (CPI),

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 what is the average price of the basket of goods and services consumed by a family
representative.
. The exchange rate is a relationship between the currencies of two countries that results in thepriceof
one of them measured in relation to the other. But, in addition to expressing quantitatively the

exchange condition between two currencies, the exchange rate expresses the exchange relationships between

two countries. The exchange rate is one of the variablesmacroeconomicmost important, especially
for a country's commercial and financial relations with the rest of the countries.
. The gross domestic product (GDP) represents the sum (in monetary values) of all the
goods and final services produced in a certain region (whether they arecountries,
statesorcities), for a determined period (month, quarter, year, etc).

5. The role of these stakeholders would traditionally be considered as agents.

the following economic ones:

. Families- Set of individuals who make decisions about consumption ofbens

(as consumers) and the supply of labor (as workers);
. Companies - Make decisions about investing in equipment and other means of
production, about the production of intermediate and consumer goods and about the demand for

work and other productive factors necessary for production;

. StateAuthority that makes consumption, investment, and policy decisions
economic, including budgetary and fiscal policy and monetary policy;
. Exterior - Represents all external agents to the economy in question and that takes
decisions on all previous issues, except decisions on economic policy.

The difference between TQM and the Cambridge version of monetary balances is:

The quantity theory of money (QTM) establishes that prices vary directly with the
amount of currency in circulation, considering that the velocity of currency circulation is the
the volume of transactions with goods and services remains unchanged. Another way to express the TQM is

to say that a change in the currency stock, in a certain period of time, has no effect
permanent on real variables, but results in a proportional change in prices of
goods and services.

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In the approach of cash balances, on the other hand, money serves as a
temporary residence for purchasing power, in the time interval between the sale and purchase of
goods. For any individual agent, whether a consumer or a company, payments
and receipts do not need to occur on the same dates. This makes the existence of
an object that each of us can use to carry purchasing power from the date when the
we receive (for example, when we sell something) for the one in which we will spend it (in the
purchase of goods and services, or financial assets, or payment of taxes, etc.

Logo: As seen, one of the differences between the transaction version and the balance approach
monetary refers to distinct emphases in the definition of currency. Such a difference, however, is more
methodological than of results, since the Cambridge version also stems from Say's Law,
arguing that it should be at the full employment level in the long term and that k is stable and
regardless of the money supply. As k remains constant, this version results in the same
proportional relationship between money supply and price level, since changes in the supply of
money causes direct changes in the spending decisions of agents. Thus, the money supply
should grow smoothly over time, to meet the basic needs of the
economy represented by the growth of real income.

8. Operation of the 2 mechanisms of Wicksell:

. Direct transmission mechanism: variations in the money supply determine

directly variations in spending: real balance effect: impulse for spending = f( excess of
nominal money stock) X liquidity trap: delay of spending = f( retention
of the coin).
∆M↑↓=∆AD↑↓ = ∆P↓↓
. Indirect transmission mechanism: variations in the money supply => variations in the rate
of interest.
∆MP↑↓ = ∆i↓↑ = ∆D↑↓ = ∆p↑↓

Part III: Multiple choice questions.

1. The fundamental causes that led to the emergence of commodity money are:

d) All the inconveniences recorded during the barter economy era.

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The difference between paper currency and banknotes is:

c) The first had a full coating in gold and silver and the second had a coating
partial in silver and gold.

The amount of the money supply in the economy is determined by three main agents,
namely the central bank, commercial banks, and the general public, however:

c) If commercial banks decide to reduce the amount of loans, the money supply
decreases.

4. The factors that determine the variation in the money supply are:

c) The monetary base, the reserve ratio, and the proportion of demand deposits.

5. The amount of currency stock available in the economy, at the end of the multiplier process, is
determined by the aforementioned factors. However:

c) A reduction in the reserve requirement rate, by one monetary unit, causes that the
the money supply decreases in proportion to the multiplier.

IV Part: Application Questions.

1. Data:
CT = Transaction cost
n = Number of transactions.

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 1
a) CT = 2 n (n-1)

1
CT = 2 250 (250 - 1)

31125.

Increase of 50.
n = 250 + 50 = 300
1
CT = 2 * 300 (300 – 1)

CT = 44850.

∆CT = 44850 – 31125 = 13725.

2. Data:
∆h(1−d)
∆PMPP = 1−d (1−r )
∆hd
∆Dv = 1−d (1−r )
∆hdr
∆R = 1−d (1−r )

Order:
M0 = 150.000
d = 80%
r = 15%

a) Deducing the monetary multiplier.

∆M1 = ∆PMPP + ∆Dv
∆h(1−d) ∆hd
∆M1 = 1−d (1−r ) + 1−d (1−r )

∆ h −∆ h d +∆ h d
∆M1 = 1−d (1−r )
∆h
∆M1 = 1−d (1−r )

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 1−d ( 1−r )∗∆ h
¿
∆ M1 1−d (1−r )
= ¿
∆h 1−d ( 1−r )∗¿
( ∆ h )∗¿
¿
1−d (1−r )
∆ M1 1
¿
∆h = ¿ = 1−d (1−r ) =m
¿
1
Logo:m=
1−d (1−r )

1 1 1
m=
Calculation: 1−d (1−r) = 1−0.8(1−0.15) = 0.32 3,125.

B 150000 150000
M1 1−d (1−r ) = 1−0.8(1−0.15) = 0.32 = 468,750.

c) Mandatory reserves: ↑∆ (5% → 7%)

20%

Part 1:

B 150000 150000
M1 = 1−d (1−r ) = 1−0.8(1−0.17) = 0.336 = 4464428.57

2Part:

M0 = 120000.

Because: M0 = (150000 * 0.2) = 30000 - 150000 = 120000

120000
M1 = 1−0.8(1−0.15) = 375000.

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3.Data:

MV = PY

Where: M = 2000mt

P = 4mt

Y = 1000

a) MV = P*Y
P∗Y
V= M
4∗1000
V= 2000

V= 2.

b) MV = P*Y
2000 * 2 = 4 * 1000
4000 = 4000

c) M +500
2000 + 500 = 2500.
MV = P * Y
MV
P= Y
2500∗2
P= 1000

P = 5.

4.Data:

Md
P Ky – Hi

Where:

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K=4

H =25

Ms
P =4000mt

P= 1

10% = 0.1

Md
a) P Ky – Hi

Md = 4y - 25 * 0.1 = 10%

Ms.
P =4000mt = Ms = 4000

Logo: Md = Ms = 4y - 25 = 4000

4y = 4000 + 2.5

40000+2.5
Y* = 4

Y* = 1000.625.

b) Md = 4y - 25 - 0.004 = 4%
Ms = 4000
Md = Ms = 4y - 1 = 4000
4000+1
Y= 4

Y* = 1000.25.